GM earnings are likely to show a profit decline amid flagging sales and higher costs

Investors are bracing themselves for a profit decline for General Motors Co. amid declining U.S. car sales and raw-materials price increases.

GM
GM, +1.43%
is slated to report first-quarter earnings before the bell Thursday, counting on the goodwill it has amassed with analysts and investors to prevent a major bloodbath for the stock.

“The earnings numbers are going to be down big time from the prior year,” said Bill Selesky, an analyst with Argus Research. “The basic reason is that sales are slowing,” with U.S. retail sales likely flat compared with prior-year sales, making it harder for GM to turn a profit, he said.

On the plus side, GM has not gone too deep into discounts to try to get its cars out of the lot, and has been diligent about selectively cutting production to better match supply and demand, he said.

Here’s what to expect:

Earnings: Analysts surveyed by FactSet expect GM to report earnings of $1.24 a share in the quarter, compared with earnings of $1.70 a share in the first quarter of 2017.

Estimize, a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, hedge-fund managers, company executives, academics and others, is expecting a first-quarter profit of $1.29 a share.

Revenue: Analysts polled by FactSet expect first-quarter sales of $34.46 billion for GM, which would compare with sales of $41.20 billion a year ago. The analysts surveyed at Estimize expect sales to reach $34.62 billion.

Stock reaction: GM stock has been the brighter star among U.S. auto makers, and it has gained 12% in the past 12 months versus losses of 9% for Tesla Inc.
TSLA, -0.44%
and 3% for Ford Motor Co.
F, +1.57%
and compared with gains around 12.3% for the S&P 500 index
SPX, -0.20%
in the same period.

The stock also compares favorably with rivals this year, down 7.3% compared with losses of 10% for Tesla and 11% for Ford. That, however, compares with losses of 0.3% for the S&P and a 1.2% decline for the Dow Jones Industrial Average.
DJIA, -0.30%

Other issues: The potential first-quarter weakness will hardly be a surprise for the market, as GM “has gone to great lengths” to flag that weakness, analysts at Evercore ISI said in a note.

“We expect GM to show notable improvements in Q2,” giving investors’ confidence over the summer that GM is “well on track to meet its guidance,” they said.

Out of the “Detroit 3,” GM has forecast the smallest headwind from commodities, and it will be good on Thursday to hear from the company that it was not “overly conservative with its assumptions and that this number has not crept up materially,” the Evercore analysts said.

Expect analysts to ask GM for updates on the South Korea unit, said David Whiston, an analyst with Morningstar. Earlier this week, GM South Korea averted a bankruptcy filing after an 11th-hour deal with the country’s unions, but concerns remain. GM has embarked on a broad restructuring in South Korea, which has included shutting down a plant.

GM recently announced a switch to reporting sales quarterly rather than monthly, and some analysts may have lingering questions about the move, Argus’s Selesky said. By going with quarterly reports, GM has said, the company avoids wild swings in share prices.

Analysts are also sure to ask about management changes at GM’s Cadillac. Steve Carlisle, managing director of GM Canada, took over as Cadillac chief executive last week, replacing Johann de Nysschen, who left GM.

“We are encouraged by this move, as we see it as a sign that GM senior management is not satisfied that Cadillac is living up to its full potential in the market, particularly outside of China,” analysts at Morgan Stanley said in a note Tuesday.

“We continue to see Cadillac as a distinct and highly valuable business that can increasingly justify an independent existence potentially outside of the GM parent/group structure,” the analysts said.

Morgan Stanley analysts last week said GM could surprise markets by taking action to lift its lagging shares.

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